Moral hazard in loss reduction and state-dependent utility. (English) Zbl 1536.91288
The moral hazard is related to the distortion of the individual’s incentive to reduce losses owing to the purchase of insurance. Purchasing insurance lowers the incentive to reduce risks when insurers cannot observe individual actions.
The authors of the paper consider a state-dependent utility model, in which moral hazard occurs in loss reduction. The theoretical model is presented to study moral hazard in the insurance market. The insurance contracts are discussed against catastrophic risks such as tsunamis, earthquakes, and hurricanes, where moral hazard is related to loss reduction rather than to loss prevention. The study enhances the understanding of health insurance in which the full reimbursement of medical expenses may not fully recover the quality of pre-loss life.
The authors of the paper consider a state-dependent utility model, in which moral hazard occurs in loss reduction. The theoretical model is presented to study moral hazard in the insurance market. The insurance contracts are discussed against catastrophic risks such as tsunamis, earthquakes, and hurricanes, where moral hazard is related to loss reduction rather than to loss prevention. The study enhances the understanding of health insurance in which the full reimbursement of medical expenses may not fully recover the quality of pre-loss life.
Reviewer: Jonas Šiaulys (Vilnius)
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